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Monday, September 27, 2010

Ambrose Evans-Pritchard is getting warmer. In June, he wrote a commentary with the provocative title: "Time to shut down the US Federal Reserve?" I thought he finally got it, the FED is the problem and not the solution. It turns out he was only upset because some employee at the FED wrote that economics should only be discussed by those who have trained at an acceptable school. I wrote about it here:

"I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing."

He doesn't cut himself any slack after this opening paragraph, for example:

"So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control."

Ambrose is now getting much closer. He sees that the FED can only inflate, it can do nothing else. A simple look at the track record since 1913 makes this quite clear. In this time the dollar has lost over 95% of its value. For the 100 years prior to that, there was virtually no net change in the purchasing power of the dollar.

He is not yet all the way there however. Ambrose is still trying to makes sense of this madness within a worldview that believes the FED is there to keep inflation low and to maintain employment and economic growth. Yes, that is the stated mission. However it certainly is not the real mission.

The confusion clears up quite easily when one considers that the real purpose of the FED is to protect the big banks. Full stop. Keep them liquid. To the extent possible, keep them solvent. The FED does this by trading treasuries for junk, providing a backstop for every and any investment, keeping interest rates low, etc. Mostly it does it by inflating the currency. The FED is the backbone of a cartel.

With this understanding, the actions are quite consistent. The banks like inflation, they want inflation, they need inflation. Since 1913, they have received plenty of it. They need it in 2010 more than ever. Monetary control in a fiat environment is the greatest wealth transfer scheme ever invented, and the mothership of this scam is the FED.

The FED wants you to keep your eye on the CPI, while the scam is ongoing in the assets -- as assets are where the wealth is transferred. This is part of the game. As long as CPI is benign, the theft through asset inflation can go on uninhibited. Thus, all the productivity improvements over the last 100 years have been offset 20-fold by the devaluation of the dollar. This productivity has gone to the banks and those who collect interest on the fictitious money created by the FED and the fractional reserve banking the FED makes possible. What a tremendous transfer of wealth.

Ambrose, this is the next step you must take - the final step in the journey. The FED's purpose is not the one stated; the purpose is to protect the banks. It is a cartel. It inflates because this is good for the banks, it protects the banks, and it transfers wealth to the banks. It allows capital to be multiplied 10- 20- or 30-fold, with interest collected on multiples of the actual savings. All of this interest is taken from the masses, where real wealth is actually produced. Yet the masses get to enjoy only a fraction of the beneft, and over the last 40 years, maybe none of the benefit.

You are too smart not too see this and not to understand it. I suspect in a couple of months, you will write "Shut Down the FED (Part III), The Final Act". In this, you will state with no hesitation that the power over money cannot be trusted to a handful of men meeting in secret. The market can and must determine "money" as it is quite capable of doing - after all, the market resolves far more complex needs than a means to transfer and store wealth.

Historically the market has entrusted gold and silver to do this job. You will finally say it.